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Chapter 2 INVESTMENT BANKING TRUE/FALSE F 1. The market in which securities are initially sold to the general public is the secondary market. F 2. When an individual buys stock through a secondary market (e.g., the NYSE), the firm receives the sales proceeds. F

3. An investment banker specializes in corporate loans.

F 4. In an underwriting, the firm selling (issuing) the securities forms the syndicate. T 5. The underwriting of an issue of securities guarantees the firm issuing the securities a specified amount of money. T 6. The risk associated with an underwriting rests with the investment bankers. F 7. A major function of the New York Stock Exchange is to raise money for firms. F 8. The price of a new issue is established through the registration process with the SEC. F 9. In a best efforts agreement to sell new securities, the firm issuing the securities agrees to make the best effort to sell the securities. T 10. Firms whose securities are already publicly held may file a shelf registration for possible future sales of stocks and bonds. F 11. If a company went public at $10 per share and the shares immediately upon reaching the public sell for $13, the $3 windfall gain goes to the underwriter. F 12. If an investment banker makes a best efforts agreement to sell 1,200,000 shares at $10 a share, the investment banker must sell at least 200,000 shares.


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F 13. A prospectus gives estimates of a firm's prospective earnings for five years. T 14. The larger the dollar value of an underwriting, the smaller is the underwriting discount as a percentage of the offer price. T 15. In an underwriting the managing house forms the syndicate. T 16. If an issue of securities is overpriced, the underwriters may let the price fall to sell the securities. T 17. The purchasing of a new issue of stock is different than buying stock on the NYSE because in the former funds flow to the firm while in the latter the funds flow to the individual selling the shares. F 18. The SEC establishes a price for a new issue of securities. F 19. A major function of the NYSE is to facilitate the transfer of funds between investors and firms. MULTIPLE CHOICE c 1. A firm that guarantees the proceeds from the sale of a new issue of securities is the a. brokerage firm b. syndicate c. underwriter d. insurance company b 2. If the initial offer price for new securities is too high, the underwriters may 1. purchase the securities with their own funds 2. sell the securities at the offer price 3. let the price fall a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 1, 2, and 3 b 3. If a stock is initially offered to the public for $20 in an underwriting but the price immediately falls to $15, 1. the firm received $20 a share


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2. the initial investors sustain a loss 3. demand exceeded supply 4. supply exceeded demand a. 1, 2, and 3 b. 1, 2, and 4 c. 2 and 3 d. 2 and 4 d

4. An 1. 2. 3.

investment banker often underwrites new issues of securities may be a division within a brokerage firm facilitates the sale of new securities a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all three

b 5. Which of the following is not part of the underwriting process? a. the prospectus b. the Federal Reserve c. the Securities and Exchange Commission d. the syndicate a

6. An 1. 2. 3.

investment banker is usually not a banker is frequently a division of a brokerage firm serves as a middleman between financial intermediaries and firms issuing new securities a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 3

d 7. Which of the following is not part of the underwriting process? a. the syndicate b. the originating house c. the prospectus d. the secondary market c

8. Venture capitalists a. buy existing securities b. are a source of funds for large firms c. buy securities issued by small, emerging firms d. register the securities they purchase with the SEC


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c 10. If 1. 2. 3. 4.

the initial offer price is too low, supply will exceed demand demand will exceed supply the price of the security will rise the price of the security will decline a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

b 11. An because a. b. c. d.

investment banker is not a financial intermediary it it it it

does not transfer money from investors to firms does not create claims on itself does facilitate the transfer of funds creates claims on itself

d 12. The Securities Investor Protection Corporation protects individuals from a. fraud by corporations b. making poor investment decisions c. other investors who fail to make delivery d. brokerage firm failures a 13. The Securities and Exchange Commission regulates a. trading in publicly held securities b. trading in privately held securities c. the margin requirement d. the amount a stock's price may change d 14. The regulation of securities markets a. discourages investing by requiring the registration of investors b. is enforced by the Federal Reserve c. protects investors from their own mistakes d. provides investors with information to make informed decisions


Test bank basic finance 9th edition mayo